Last year, Baton Rouge welcomed three shiny new office buildings to the Class A market, adding more than 150,000 square feet of premium workspace.
The high-tech office park @Highland opened the doors of its first building in early 2018 on the corner of Bluebonnet Boulevard and Highland Road, with developer Mo Vij’s company—General Informatics—as the anchor tenant. On the opposite side of town, the River House and Water Campus office buildings also began leasing Class A space along the Nicholson corridor.
The fact these buildings over the past year have been slow to secure tenants—rather unusual for such fresh and attractive office spaces—points to an accelerating decline in demand, raising this question: Has Baton Rouge has reached its fill of Class A inventory?
The sleek glass-and-steel @Highland building, for instance, has yet to announce tenants to join General Informatics in the $20 million, 52,000-square-foot, three-story structure, completed in late 2017. River House’s 34,000-square-foot office building, meanwhile, has also been on the market for more than a year and has yet to sign any tenants.
“2018 overall was slow for office,” says Ty Gose, of NAI/Latter & Blum, the leasing agent for both
@Highland and River House. “It was just slow across the city. This year has been more active.”
Gose is currently working on proposals for several prospective @Highland tenants, though he declines to disclose further details. River House, he adds, is seeing increasing activity this year for the first two floors of the three-story structure.
The Water Campus, on the other hand, landed its first commercial tenant last August. Global engineering and design firm Stantec plans to move into a 14,000-square-foot space on the fourth floor of 1200 Brickyard Lane, a 94,000-square-foot office building under construction at the campus that’s expected to be completed this summer.
Seven months later, though, few other businesses have signed on to lease space in the Commercial Properties project. Leasing agents expect to land another tenant by the end of March and are in talks with a third, but it’s unlikely those would fill the remaining space, let alone several other multi-tenant office buildings planned for the Water Campus.
When supply trumps demand then rent rates take on heightened importance. And the high costs associated with the construction of these new buildings—as well as non-traditional locations—are presenting challenges. Rental rates for the Water Campus are on the high end at $30 per square foot, which includes all expenses as well as a tenant improvement allowance for space build-outs.
“It’s hard to get people to bear the price for a new building, but that’s a problem anybody would have,” says Donna Whalen Little of Corporate Realty, which is leasing the building. Commercial Properties Realty Trust—the arm of the Baton Rouge Area Foundation that is developing the Water Campus—did not return requests for comment.
It doesn’t help that the Class A office market has been softening over the past few years, especially in the downtown area. Overall, Baton Rouge occupancy rates have dropped from a recent high of 93.5% in March 2015 to 85.6% in March 2018. Downtown office occupancy rates, meanwhile, were slightly lower at 84% in 2018.
And rates remained flat over the past year, says Gose, who is currently compiling data for the annual TRENDS in Baton Rouge real estate seminar in May.
Other leasing agents have noticed the softening market, as well, exacerbated by the new construction and buildings coming online.
“The downtown market is soft,” says Carmen Austin, an agent/broker with Saurage Rotenberg Commercial Real Estate. “It’s hard for the existing glut of office space on the market when new Class A space comes in. It’s hard to compete.”
Compounding the issue are changing workplace trends. More people work from home today or have more flexibility in where they can work. “In general there’s less need for office space,” she says.
Working downtown or in other Class A offices in Baton Rouge has benefits, such as shared maintenance and other costs, but it also has its takeaways, such as inconvenient parking, that may be pushing companies toward other types of office space.
“The majority of deals we’re seeing and where we’re seeing businesses relocating to is garden offices and suburban buildings,” says Mathew Laborde, CEO of Elifin Realty. “It’s an opportunity to have your own footprint and own building.”
To counter the changing trends, landlords are becoming more aggressive with their rental rates and concessions, says Laborde, adding companies—including his own—still want to be downtown.
High-profile developers are also still hedging their bets on the market. Mike Wampold, who bought the Chase South Tower last year, is planning to redevelop the high-rise into a mixed-use office, retail and residential property. At the time, Wampold said the investment is a testament to his faith in downtown and Baton Rouge.
“I happen to be a believer in downtown,” he said.
The shifts in the office market, from downtown Class A to the garden market in the suburbs—and perhaps back again—is simply part of the natural real estate cycle, Laborde says.
“Downtown is getting more competitive, while the suburban market is going the other ways,” he says. “Property owners realize there’s a lot of demand and those lease rates are going up. It’s the natural ebb and flow.”